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Hello SOTGC community,
2012 was quite an interesting and surprising year for investors. Despite the end-of-the-year “fiscal cliff” bickering in Congress and the European sovereign debt crisis, the U.S. stock market, as measured by the S&P 500, grew more than 13 percent in 2012.
I predict that there will continue to be volatility in the stock market over the next several months as Congress continues to “kick the can” down the road on the debt limit, federal budget, spending reductions, and tax increases. At some point later this year, we’ll have to face the music. It makes the retail investor want to avoid the stock market and hide under the covers.
But is keeping cash on the sidelines really a good wealth-creation strategy? Ever heard of inflation? So what about that old reliable standby — bonds? Investment grade bonds are yielding the lowest rates in decades and interest rates are going to stay low for a while. And when interest rates do start to rise, that will push bond prices down, resulting in a huge blow to holders of bonds.
This looming environment leads me to continue advocating to my clients the bread-and-butter strategy of writing covered calls on fundamentally sound dividend-paying stocks. The covered call strategy can leverage some of the upside potential of uptrending stocks and ETFs, while generating income AND limiting some downside risk.
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